Credit Update: AI Capex Strains Alphabet’s Metrics, but Strong Earnings Provide a Cushion

• Services pays the bills, Cloud drives the growth: Google Services’ operating income rose 16.8% YoY to USD 39.2bn, with its operating margin widening to 40.7% from 38.5%. Cloud operating income more than tripled YoY to USD 11.1bn, with its operating margin rising to 36.2% from 23.7%.
• Free cash flow has turned more negative. Capex of USD 51.4bn was 121.4% of operating cash flow, pushing free cash flow to −USD 9.1bn from −USD 5.9bn in 2Q26 . Full-year guidance implies even higher 4Q26 capex, so we expect free cash flow to stay negative in the near term.
• Leverage is rising but remains low. Total debt more than doubled to USD 150.3bn since end-2025. Total debt/EBITDA of 0.81x, interest coverage of 51.0x and net cash of USD 39.6bn still leave ample financial headroom.
• USD bonds look fairly priced. The USD curve yields 66–90 basis points (bps) over Treasuries, in line with its ratings against peers. For higher yields, the GOOGL 6.250% 2036 (AUD) offers 6.32%, a pickup of 123 bps over comparable Australian government bonds.

Cloud drives growth as margins widen

Alphabet’s revenue rose 24.7% year-on-year (YoY) to USD 127.6bn in 3Q26. This marked the company’s 13th consecutive quarter of double-digit revenue growth.

Google Services revenue, which makes up 75.5% of total revenue, increased 10.6% YoY to USD 96.3bn, led by 12.0% growth in Google Search & Other revenue.

Figure 1: Google Services revenue breakdown

Revenue from Google Cloud (24.1% of total revenue) surged 102.6% YoY to USD 30.7bn. Growth was led by Google Cloud Platform (GCP) across AI infrastructure, AI solutions and core GCP services, with TPU system sales also a meaningful contributor. Google Cloud’s revenue backlog rose to USD 560.8bn from USD 514bn in 2Q26. Just over 55% of Alphabet’s total backlog of USD 567.7bn is expected to be recognised as revenue over the next 24 months.

Other Bets revenue (0.3% of total revenue) growth accelerated, rising 8.1% YoY to USD 372mn compared with 2.4% growth in 2Q26.

Operating income rose 29.9% YoY to USD 40.6bn. In dollar terms, Google Services remained the profit engine, generating USD 39.2bn of operating income (+16.8% YoY), or 96.5% of the group total. Google Cloud, however, was the growth engine: its operating income more than tripled (+209.4% YoY) to USD 11.1bn from USD 3.6bn. This added USD 7.5bn, more than the USD 5.6bn added by Google Services, and was the largest contributor to the USD 9.3bn increase in group operating income. Partly offsetting this, Other Bets’ operating loss widened 43.5% YoY to USD 2.0bn and Alphabet-level costs, mainly shared AI research and development, rose 71.4% YoY to USD 7.7bn. Together, these reduced group operating income by USD 9.7bn, up from USD 5.9bn a year ago.

On a YoY basis, group operating margin improved to 31.8% in 3Q26 from 30.5% in 3Q25, as revenue growth outpaced cost growth. Google Services’ operating margin widened to 40.7% from 38.5%, showing that the segment is still expanding profitability at scale. Google Cloud saw the sharpest improvement, with its operating margin rising to 36.2% from 23.7%. This suggests the segment’s heavy AI investment is translating into earnings rather than just revenue. Cloud is also closing the profitability gap with Services, narrowing it to 4.5 percentage points (ppt) from 14.8ppt a year ago.

EBITDA (operating income before depreciation and amortisation) rose 32.9% YoY to USD 48.9bn from USD 36.8bn.

Free cash flow turns more negative as capex accelerates

Operating cash flow fell 12.6% YoY to USD 42.3bn. Management attributed this to inventory build-up for TPU system sales and a USD 5.2bn payment for the 2018 European Commission fine, following the conclusion of the appeal process. Excluding the fine, operating cash flow would have been around USD 47.5bn, only 1.9% lower YoY. This suggests underlying cash generation remains broadly intact.

Free cash flow deteriorated to −USD 9.1bn, from −USD 5.9bn in 2Q26, as capex of USD 51.4bn exceeded operating cash flow. Capex has now exceeded operating cash flow for two consecutive quarters, reaching 121.4% of it in 3Q26. On a trailing twelve-month (TTM) basis, the capex-to-operating-cash-flow ratio rose to 89.0% from 51.4% a year ago. This means Alphabet now reinvests almost 90 cents of every dollar of operating cash into capital expenditure, predominantly AI infrastructure. TTM free cash flow remains positive at USD 19.7bn, but this is down 73.2% YoY.

Alphabet kept its full-year 2026 capex guidance unchanged at USD 195–205bn. With USD 132.0bn spent in the first nine months, this implies 4Q26 capex of USD 63–73bn, well above 3Q26’s USD 51.4bn. Management also expects capex to increase significantly in 2027, with details to come on its 4Q26 call. As such, we expect free cash flow to remain negative over the coming quarters. TTM free cash flow is likely to turn negative as the stronger 4Q25 and 1Q26 quarters drop out, and as Alphabet continues to invest in its AI capabilities.

Table 1: Quarterly cash flow

Balance sheet more leveraged, but still strong

Alphabet’s debt has risen sharply as it borrows to fund the gap between its AI-driven capex and operating cash flow. Total debt, including operating and finance lease liabilities, more than doubled to USD 150.3bn at 30 September 2026 from USD 67.0bn at end-2025. As a result, total debt/TTM EBITDA rose to 0.81x (3Q25: 0.31x), while interest coverage (TTM operating income/TTM interest expense) fell to 51.0x (3Q25: 252.7x). Despite the deterioration, both metrics remain very strong.

Table 2: Leverage and interest coverage

Liquidity also remains healthy. Excluding the USD 75.2bn SpaceX stake, which is subject to short-term sale restrictions, Alphabet held USD 189.9bn of cash and marketable securities. This leaves a net cash position of USD 39.6bn, down from USD 59.8bn at end-2025.

Near-term debt maturities are small. Of USD 127.5bn of long-term debt outstanding, only about USD 1.0bn is due within the next 12 months. As a result, we see minimal near-term refinancing risk.

Off-balance sheet commitments add to Alphabet’s funding needs. Material purchase commitments totalled USD 924.4bn as of 30 September 2026. These are mostly long-term supply agreements for technical infrastructure and inventory, as well as energy take-or-pay contracts and content licences. Alphabet also has USD 130.5bn of data centre and energy leases yet to commence, and USD 98.5bn of contingent commitments, mainly backstops and guarantees supporting data centre and energy partners. Of the purchase commitments, USD 213.4bn is due within 12 months. We expect these payments to be met from operating cash flow (USD 179.6bn TTM), cash and marketable securities (USD 189.9bn) and additional debt issuance. Alphabet returned to the bond market on 2 November with a €6bn seven-tranche euro bond sale, which drew orders of just over €17bn.

Overall, Alphabet’s credit profile remains strong, underpinned by its dominant Google Services franchise, a rapidly growing profit contribution from Google Cloud and ample liquidity. However, its balance sheet is becoming more leveraged as AI and data centre investment accelerates. Debt issuance has stepped up, leverage is rising and free cash flow has turned negative, as quarterly capex now exceeds operating cash flow. With capex guided to rise further in 4Q26 and 2027, we do not expect these trends to reverse in the near term. That said, Alphabet retains considerable financial headroom, with low leverage, strong interest coverage and a net cash position.

Alphabet has a broad curve of outstanding USD bonds (Table 3). Relative to comparable US Treasuries, these offer a yield pickup of roughly 66–90 bps across tenors from 5–9 years, which we view as fairly priced.

Against Amazon (AA / A1 / AA-), rated one to two notches lower, Alphabet yields 4–16 bps less at every maturity. At nine years, the GOOGL 4.700% 15Nov2035 yields 5.78% against 5.86% on the AMZN 4.650% 20Nov2035, an 8 bps give-up reflecting Alphabet’s higher rating.

Against Meta (AA- / Aa3 / -), also rated one to two notches lower, Alphabet yields less across comparable maturities. The gap widens from 11 bps at five years to around 40-45 bps from six years onwards. At nine years, the GOOGL 4.700% 15Nov2035 yields 5.78% against 6.18% on the META 4.875% 15Nov2035, 40 bps less.

Against Microsoft (AAA / Aaa / -), rated one to two notches higher, Alphabet yields more: 22 bps more at five years and 49 bps more at nine years. At nine years, the GOOGL 4.700% 15Nov2035 yields 5.78% against 5.29% on the MSFT 4.200% 03Nov2035.

On balance, we view Alphabet as fairly priced within the peer group: the higher yields available from Amazon and Meta are consistent with their weaker credit profiles, while Microsoft’s tighter pricing reflects its AAA rating.

For investors seeking higher absolute yields, Alphabet’s AUD bonds (Table 4) offer more than its USD curve, reflecting wider spreads over the sovereign benchmark. At a comparable tenor, the GOOGL 5.500% 27Aug2031 Corp (AUD) yields 5.84% with a pickup of 104 bps, against 5.40% and 70 bps on the similar-dated GOOGL 4.875% 15Aug2031 Corp (USD). Across the AUD curve, pickups range from roughly 67–123 bps over tenors of 3 – 10 years, with the GOOGL 6.250% 27Aug2036 Corp (AUD) offering the highest yield at 6.32% and a pickup of 123 bps. All three AUD issues are available on Bondsupermart Live, with a minimum investment of AUD 10,000 and subsequent increments of AUD 10,000.

Table 3: Peer Comparison

Table 4: AUD bonds

Disclosure: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in GOOGL 5.200% 27Aug2029 Corp (AUD), GOOGL 5.500% 27Aug2031 Corp (AUD), GOOGL 6.250% 27Aug2036 Corp (AUD). The analyst who produced this report holds a NIL position in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.